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Higher inflation dampens rate cut chances

Belinda Merhab

Higher-than-expected inflation means the Reserve Bank's next move on interest rates is likely to be up rather than down, but any move is still a while away.

Official headline inflation on Wednesday came in close to expectations, showing a rise of 0.5 per cent in the June quarter and three per cent for the past 12 months.

But underlying inflation, which the Reserve Bank focuses on when considering interest rate moves, came in at a higher-than-expected 2.8 per cent.

That result, which sits at the top of the RBA's two-to-three per cent inflation target band, pretty much rules out the chance of a rate cut in the near future.

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"Over the past four to six weeks we have seen some speculation that the RBA could potentially be firming up their easing bias and speculation that rate cuts could be forthcoming," JP Morgan economist Tom Kennedy said.

"Given quite a solid core print, we think that speculation is likely to be dialled back in market pricing a fair bit so, for us, there should be no change here for the RBA.

"We're not going to see rate cuts in the next few months and it is likely that we'll see the RBA just reinforce their guidance that the cash rate is going to remain on hold for some time yet."

Higher house prices and rents helped drive inflation up in the quarter, along with rising costs for medical services, childcare, and tobacco.

The Australian dollar rallied as high as 94.39 US cents following the release of the data amid expectations that the RBA would keep rates on hold for a while longer.

Commonwealth Bank economist Michael Workman said he expected headline inflation to fall to about 2.5 per cent as electricity prices drop following the abolition of the carbon tax.

But he said there were a number of forces at work that could make it difficult to see the effect of the tax cut.

Gas prices had risen, other taxes such as the petrol excise were being increased, and some companies had absorbed the carbon tax so would not have any price cuts to pass on to consumers.

CBA has pushed back its expectations for when the RBA will lift the cash rate, from November to February.

Most economists expect the central bank will keep the cash rate on hold at 2.5 per cent for the remainder of the year.